gki zrt., 22 may 2014, brussels andrás vértes chairman gki economic research ten years of...

GKI Zrt., www.gki.hu

22 May 2014, Brussels

András VértesChairman

GKI Economic Research

Ten Years of Membership and Crisis Management in the Central and

Eastern European Member States of the EU


Crisis Hit

Financial and economic crisis hit the region mostly by:

• freezing of the international capital flows,• the drop of import needs of the W-E countries

Result: stability failure, but mostly current account balance and foreign debt financing problems, rather than general government debt crisis (as in EAP6).

„Openness” transformed to „exposure”.

These needed fast and radical external equilibrium improvement.


Capital plus current account (in per cent of GDP)

Source: Eurostat, EU 2014 Spring Forecast


Net international investment position (in per cent of GDP)


Broken Convergence?

Before the crisis general catching up: „economic miracle” (except HU)

Further sizable catching up after 2007 inPoland, Lithuania, Latvia, Bulgaria, Romania, Slovakia

Stagnation or decline inEstonia, Hungary, Croatia, Czech Republic, Slovenia

Last decade = lost decade for CZ, HU, SI (2004: three best)But general line up to EU average continued



GDP (PPS) per capita (as per cent of EU average)

Source: Eurostat

Fiscal adjustment

• Successful internal devaluation (on an extremely flexible labour market) in Baltic States, but unrepeatable elsewhere!

• New, more or less sustainable path, excluding Slovenia and Croatia. Potential risk in Hungary and Slovakia.

• Fiscal adjustment has the most favourable effects if− well planned in timing (neither too fast, nor too slow),− concerned with the stake-holders,− the banking system is solid with good lending capacity, − social welfare services are strong.

• Share of external financing increasing



General government gross debt (ESA, as percentage of GDP)



Foreign financed general government gross debt to GDP (2008, 2012 in per cent)

Source: Eurostat, GKI calculations

0

10

20

30

40

50

60

CZ HU SI PL BG RO EE LV LT

2008 2012

Social tensions

• Sharp worsening in: unemployment rate income inequality, risk of povertygovernment spending on social welfare

• Turnaround towards grey and black economy (mostly sme-s)• Young generation has little chance to get the right job on the

labour market – migration to W-E

• Free movement on the European labour market – debated question!?



Unemployment rate (in per cent)

Source: Eurostat , EU 2014 Spring Forecast

Financial sector

• Guilty and victim at the same timepolitical push and overtaxation

• High share of foreign ownership stagnation of funding (Vienna Initiative) new tendency: withdrawal behind the national border

• Deleveraging and NPL: access to finance• Too low inflation

• Instable money markets, yields and exchange rates



Percentage of the banking system that is foreign owned, CEE10 and EAP6

Note: This percentage is calculated as the total assets of foreign owned subsidiaries/branches as % of total banking system assets Source: André Sapir, Guntram B. Wolff (Bruegel) 2013.

SI HU LV PL BG LT RO CZ SK EE ES IT PT EL CY IE0

10

20

30

40

50

60

70

80

90

100

2008 2012


Banks foreign funding exposure (in per cent of GDP, 2008-2012)

Source: Mihály Kovács, ECFIN Country Focus , July 2013

2008/03/ 2009/03/ 2010/03/ 2011/03/ 2012/03/40

50

60

70

80

90

100

110

120

CZ HU PL RO SK


Corporate sector debt in the CEE10 and EAP6(in per cent of GDP)

Source: Private sector deleveraging in Hungary: economic costs amplified by government policies in the banking sector,Mihály Kovács, ECFIN Country Focus, July 2013

LT HU LV RO EE BG PL CZ SK SI EL ES0

20

40

60

80

100

120

140

160

180

200

2202008 2012


Household sector debt in the CEE10 and EAP6(in per cent of GDP)

Source: Mihály Kovács (2013)

0

20

40

60

80

100

120

RO BG LT HU LV EE SK SI CZ PL ES PT IE

2008 2012


Interest rate spreads over 10ys euro yield(basis point)

Source: Eurostat


CE currencies exchange rate to the euro (31 December 2009 = 100)

Source: ECB

Crisis Management in CEE

Market assessment: the best three Poland, Estonia and Slovakia, none of them was among top three (SI, CZ, HU) at the time of accession

Neither size, nor geography, nor EMU membership, nor development level mattered!

Crucial: performance of the national governance• understanding world changes and deepness of the crisis,• prepared for unexpected, collect and mobilise reserves,• look for international support,• improve ability to adapt (education, LLL, retraining).Future risk: low growth with high debt!


Recommendations 1.Sound budgetary policies, smart budget reforms

• MFF should support public services reforms (aiming long term savings and improved quality)

• Positive incentives to budget consolidation– common pool for the financing of the state debt in EA– establishment of a EU level Treasury (eurobonds),– yearly maximum 3% of GDP fresh debt financing for a

country who meet the new EDP criteria,– the yield could be lower than actual market rate,– the same might apply to non-euroarea country if it

meets the criteria.


• Coordinated measures at the level of EU against tax evasion and fraud

• Promoting joint management of government functions of member states (foreign representation, R&D&I, higher education, special hospital treatments, etc.)

• As under well designed circumstances a modest (2-3%) inflation might help to improve the budget equilibrium and debt rate, rethinking of the regulation is suggested


Recommendations 2.Sound budgetary policies, smart budget reforms

• Give incentives to privatisation if it reducing debt and improving competition (together with smart regulation and consumer protection)

• Establishing an independent EU think tank dealing with budgetary reforms, best practices and lessons from mistakes, and country recommendations

• The macro assumptions should be discussed with EU-wide think tanks

• Fine tuning of new EDP rules GKI Zrt., www.gki.hu

Recommendations 3.Supporting the decrease of government debt

• New tools of the economic governance (banking union, MIP) should aim to improve growth potential of the EU

• Non-bank financing channels should be strengthened accessible for SME sector (cheap refinancing, venture capital, EIB, direct EU budget financing)

• EU-level effective deregulation programs

• Establishing a fund in EU budget for 200 best universities to attract the best experts of the world (with quotas for students coming from less developed member states)


Recommendations 4.Supporting growth

• As euro-zone stabilises it offers stability advantages to CEE member states

• Joining to the EMU will have a positive effect on growth and competitiveness of non euro-zone CEE countries and on euroarea as well

• Entry criteria can be simplified concentrating on medium term sustainability

• It needs the revitalisation of a sizeable catching-up process


Recommendations 5.Eurozone entry

• Correction of the macro surveillance with strengthened analyses of employment and social policies, introduction of new EU standards

• Principles of pension system and unemployment benefit should be unified and lift to EU level to shape the business cycle

• Complementing the social security with a mandatory funded state pension sub-system which should be treated as a part of General Government from the EDP point of view

• Increase social solidarity funds in the EU budget (child poverty, homelessness, roma inclusion)

• Ensure transferability of social rights and services• Improve mobility of workers by removing regulation barriers


Recommendations 6.Towards social union


Thank you for your attention!

gki zrt., 22 may 2014, brussels andrás vértes chairman gki economic research ten years of...

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